"Elasticity" is the insider word in the consumer staples space that describes consumers' willingness to pay more for products. And right now, based on how well Kimberly-Clark (KMB -1.00%) is performing, customers are very accepting of higher costs. Here's why investors shouldn't get too comfortable with the good news today and forget that, at some point, consumers will push back.
Starting the year with a bang
Kimberly-Clark's first-quarter organic sales increased a massive 10% year over year. That's a huge increase by any stretch of the imagination for a company that sells consumer staples like toilet paper. Yes, we all need toilet paper and we're all happy to have ample access to it (noting the shortages in the early days of the pandemic), but historically this type of product would have been considered slow and boring.
That's just not the case right now, thanks to inflationary pressures -- which is a key factor in Kimberly-Clark's results.
Image source: Getty Images.
For example, price increases accounted for 6 percentage points of the same-store sales improvement even as consumers bought more of its wares and shifted to higher-cost items. Since most companies are increasing prices due to higher manufacturing costs, even at the low end of the market, Kimberly-Clark has the cover to be more aggressive. Indeed, even store brands are likely happy to see the company push through price increases because that means they can raise prices and not destroy their own value proposition (a relatively low price).
Kimberly-Clark was so impressed with its own quarter, and rightly so, that it increased its guidance for full-year same-store sales growth from 3%-4% to 4%-6%. The absolute numbers here are small, but percentage-wise the change is potentially gigantic.
High expectations
Some of that change is tied directly to the fact that Kimberly-Clark has already locked in a strong first quarter. That makes the rest of the year "easier" in a sense. But there's the small problem of how much pain consumers can take before they start to pull back. That's the elasticity issue that peer Procter & Gamble (PG -0.37%) is watching like a hawk.
Note that P&G, which is also doing very well right now, and isn't simply pushing through price increases. It is being tactical. For example, it has been tying price increases to product improvements as a way to justify price hikes. P&G has a broader portfolio than Kimberly-Clark, so there's a very real question here about how Kimberly-Clark can increase prices on mainstays like paper towels, toilet paper, and tissues. There may be flexibility in the hygiene and diaper spaces, but such personal care items can't hold up the whole business.
To be fair, the price hikes that Kimberly-Clark has already pushed through will likely help support results in the quarters ahead. So it is unlikely that there will be a sudden and extreme drop-off in performance. But that doesn't mean that the company can continue to push through big price hikes forever. Moreover, those increases will eventually get lapped, at which point Kimberly Clark will be facing tough comparisons. So the good news simply won't last forever because it can't. And if there's a recession, the dynamics can change unpredictably since no company wants to raise prices into economic weakness if it can avoid it.
Trust but verify
There's no particular reason to doubt Kimberly-Clark's ability to live up to its new 2022 organic sales goals. However, given the material price increases it has pushed through so far, it is realistic to wonder how much more consumers will take before they become increasingly inelastic and switch to cheaper alternatives. If P&G, with a more value-add collection of businesses, is watching closely for this, Kimberly Clark, which has a basics-heavy business, will likely be hit sooner and harder when the turn eventually comes.
